Timing of Purchase

Today TaxMama® hears from Insha in the TaxQuips Forum with this question. “I run a daycare center in my home. I file a Schedule C on the cash basis. In February 2011, I bought an asset for my business that cost $2,000. I’m making payments of $100 per month on it. So, on my 2011 tax return, how do I list it as an asset for depreciation? Do I use the whole $2,000? Or do I use what I’ve paid on it this year; and just keep adding what I pay each year to the asset?

Dear Insha,

That’s a sensible question. I can see how that would be unclear. So, here’s how it works.

When you buy something on credit, whether via credit card or a loan, your ownership date is the date of the original purchase. You have bought it. You are now officially obligated to pay for it. So enter the item into your depreciation schedule on February 2011, with a value of $2,000.

You can depreciate it over time, or take Section 179 depreciation, all at once. Only use Section 179 depreciation if you will be using that asset for longer than the depreciable life; otherwise, you will have to pay back the depreciation.

You can also claim a deduction for the interest on the loan. But not the principal – since you are picking up the purchase price all at one time.  IRS Publication 946 explains How to Depreciate Property if you want to learn more.

And remember, you can find answers to all kinds of questions about assets, depreciation, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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